FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT O SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _______ to _______
Commission file number 33-20432
MAGNITUDE INFORMATION SYSTEMS, INC.
-----------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware 75-2228828
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(State or other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
50 Tannery Road, Branchburg, New Jersey 08876
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(Address of Principal Executive Office) (Zip Code)
(908) 534-6400
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(Registrant's telephone number including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No _____
The number of shares of Registrant's Common Stock, $0.0001 par value,
outstanding as of March 31, 1998, was 8,346,991 shares.
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
INDEX
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Page
Number
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PART 1 - FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheet
- March 31, 1999 3
Consolidated Statements of Operations
- Three months ended March 31, 1999 and 1998 4
Consolidated Statements of Cash Flows
- Three months ended March 31, 1999 and 1998 5
Notes to Consolidated Financial Statements 6 - 12
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 14
PART II - OTHER INFORMATION 15
SIGNATURES 16
FINANCIAL DATA SCHEDULE 17
2
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PART I - Item 1
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Unaudited)
March 31, 1999
--------------
ASSETS
Current Assets
Cash ............................................. $ 823
Accounts receivable, net of allowance for
doubtful accounts of 106,589 ..................... 80,963
Inventories ...................................... 26,789
Prepaid expenses ................................. 546,683
-----------
Total Current Assets .......................... 655,258
Property, plant and equipment .................... 138,874
Acquired software assets ......................... 1,302,882
Other assets ..................................... 65,561
-----------
TOTAL ASSETS .......................................... 2,162,575
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LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Accounts payable and accrued expenses ............ 1,103,545
Dividends payable ................................ 9,000
Prepayments received ............................. --
Loans and notes payable .......................... 857,500
Current maturities long-term debt ................ 64,503
Current maturities lease obligations ............. 15,826
-----------
Total Current Liabilities ..................... 2,050,374
Long-term debt, less current portion ............. 1,276,060
Lease obligations, less current portion .......... 29,839
-----------
TOTAL LIABILITIES ..................................... 3,356,273
STOCKHOLDERS' EQUITY
Preferred Stock Ser.A, $0.01 par value, 3,000,000
shares authorized, 0 and 100,000 shares issued and
outstanding ...................................... --
Cumulative Preferred Stock, $0.001 par value,
10 shares issued and outstanding ................. 0
Common Stock, $0.0001 par value, 30,000,000 shares
authorized, 8,346,991 issued and outstanding ..... 835
Contributed capital .............................. 81,000
Additional paid-in capital ....................... 8,218,195
Accumulated deficit .............................. (9,493,728)
-----------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) .................. (1,193,698)
TOTAL LIABILITIES AND EQUITY .......................... $ 2,162,575
===========
See notes to consolidated financial statements
3
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1999 1998
------------- ----------
Revenues ..................................... $ 44,507 $ 1,012,418
Cost of Goods Sold ...................... 42,876 491,737
------------ -----------
Gross Profit ................................. 1,631 520,681
Selling expenses ........................ 165,471 299,197
General & administrative expenses ....... 421,975 448,503
----------- -----------
Operating Income (Loss) ...................... (585,815) (227,019)
Miscellaneous income .................... 63,675 0
Interest expense (net) .................. (51,837) (80,717)
Miscellaneous expenses .................. (13,685) 0
----------- -----------
Non-Operating Income (Expense) ............... (1,847) (80,717)
----------- -----------
Net Loss ..................................... $ (587,662) $ (307,736)
=========== ===========
Loss per Common Share ........................ $ (0.08) $ (0.09)
=========== ===========
Weighted Average Number of
Common Shares Outstanding ............... 7,295,093 3,361,736
See notes to consolidated financial statements
4
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
1999 1998
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Cash Flows from Operating Activities
Net income (loss) ......................... $ (587,662) $ (307,736)
Adjustments to net income (loss)
Depreciation and Amortization .......... 45,794 50,889
Decreases (increases) in Assets
Accounts receivable .................... 83,029 (420,431)
Inventories ............................ 0 39,860
Prepaid advertising .................... 0 (375,000)
Prepaid expenses ....................... (161,075) (28,753)
Other assets ........................... (450) 0
Increases (decreases) in Liabilities
Accounts payable and accrued expenses .. (570,198) 5,605
---------- ----------
Net Cash Provided (Used) by Operating Activities (1,190,562) (1,035,566)
Cash Flows from Investing Activities
Rolina acquisition ........................ 0 (763,890)
Capital expenditures ...................... 0 (72,484)
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Net Cash Provided (Used) by Investing Activities 0 (836,374)
Cash Flows from Financing Activities
Proceeds from notes payable ............... 0 225,000
Conversion of equity subscriptions ........ 0 (175,000)
Repayment of notes ........................ (184,177) (20,000)
Repayment of long-term debt ............... (19,500) (58,250)
Issuance of common stock .................. 1,385,659 1,900,890
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Net Cash Provided (Used) by Financing Activities 1,181,982 1,872,640
Net Increase (Decrease) in Cash ................ (8,580) 700
Cash at Beginning of Period .................... 9,403 4,546
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Cash at End of Period .......................... $ 823 $ 5,246
=========== ===========
See notes to consolidated financial statements
5
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
BACKGROUND
Magnitude Information Systems, Inc. (the "Company" or "Magnitude") was
incorporated as a Delaware corporation on April 19, 1988 under the name
Fortunistics Inc. On March 4, 1993, the Company changed its name to Whitestone
Industries, Inc. On July 14, 1997, the Company changed its name to Proformix
Systems, Inc., and on November 18, 1998, the Company changed its name to
Magnitude Information Systems, Inc.
On June 24, 1997, the Company, Royal Capital, Inc., and Proformix, Inc., a
Delaware corporation and manufacturer of ergonomic keyboarding systems, entered
into an Acquisition Agreement. Proformix, Inc. in November 1998 changed its name
to Magnitude, Inc. and is hereafter referred to as Magnitude, Inc.. Pursuant to
the Acquisition Agreement, Magnitude Inc. shareholders were offered 1 share of
the Company's common stock for every 3.4676 shares of Magnitude, Inc. common
stock, and 1 share of preferred stock for every 1 share of Magnitude, Inc.
preferred stock. At the time of this submission, holders of approximately 98% of
Magnitude, Inc. common stock have tendered their shares in exchange for
Whitestone common shares. The remaining 2% of Magnitude, Inc. stockholders hold
a minority interest which is valued at $0. For accounting purposes, the
acquisition has been treated as an acquisition of Whitestone by Magnitude, Inc.
and a recapitalization of Magnitude, Inc.. As a result, the Company and
Magnitude, Inc. remain as two separate legal entities whereby Magnitude, Inc.
operates as a subsidiary of Magnitude Information Systems, Inc.. The operations
of the newly combined entity are currently comprised solely of the operations of
Magnitude, Inc.
On February 2, 1998, the Company entered into an Agreement and Plan of Merger
with Rolina Corporation, a privately held New Jersey software developing firm,
and on April 30, 1998, into an Asset Purchase Agreement with Vanity Software
Publishing Co., a Canadian developer of specialized software, whereby the
Company, in return for payments in form of cash and equity, acquired the rights
to certain software products and related assets, with such software products
subsequently forming the basis for the further development, during the year, of
the Company's proprietary Proformix EMS Software System.
On November 18, 1998, the Company and its wholly owned subsidiary Magnitude,
Inc. entered into an Asset Purchase Agreement and several related agreements
with 1320236 Ontario Inc. ("OS"), a publicly traded Canadian designer,
manufacturer and distributor of office furniture based in Holland Landing,
Ontario, Canada, pursuant to which OS acquired Magnitude, Inc.'s hardware
product line comprised of the Company's ergonomic keyboard platform products and
accessories, and all related inventory and production tooling and warehousing
assets, and all intellectual property rights including the Proformix name,
against a cash consideration and an ongoing contingent stream of royalty
payments on OS' sales of the Proformix hardware products. The Company will
continue to market its proprietary software under the Proformix label. The
Agreement with OS also provided for the retirement of the Company's then
existing bank debt, out of the proceeds of the transaction. Further details
regarding this transaction may be obtained from the Company's related filing of
February 9, 1999, on Form 8-K, incorporated herein by reference.
Until November 18, 1998, when the Company sold its hardware product line
comprised of Magnitude, Inc.'s ergonomic keyboard platform products and
accessories, its business was primarily centered around the design, development,
manufacture, and marketing of research-based ergonomic accessory products for
the computerized workplace. In parallel, and beginning with the February 1998
6
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
acquisition by the Company of Rolina Corporation, which had developed an
ergonomic software product that was being marketed under the name "ErgoSentry",
and the subsequent acquisition in May 1998 of substantially all of the assets of
Vanity Software Publishing Corporation, which also included a certain ergonomic
software package known as "ErgoBreak", the Company engaged in the development of
a unique suite of software packages designed to increase productivity in the
computer related work environment which include the before mentioned
"ErgoSentry" and "ErgoBreak" products. These efforts resulted, in November 1998,
in the release to the market of the proprietary "Proformix EMS" (Ergonomic
Management System) software system. With the sale of the hardware product line,
the Company's business is now focused exclusively on the further development and
marketing of these software products. As such, the Company currently must be
considered an enterprise in transition, because it has not yet realized material
revenues from licensing its software.
Magnitude Inc.'s wholly owned subsidiary, Corporate Ergonomic Solutions, Inc.
(Ergonomics) was incorporated in the State of New Jersey during October 1992.
Ergonomics, which commenced operations in September 1997, was formed primarily
to market hardware products. Its operations during 1998 have not been
significant.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Magnitude
Information Systems, Inc. and its subsidiaries, Magnitude, Inc. and
Corporate Ergonomic Solutions, Inc. All significant intercompany
balances and transactions have been eliminated.
Inventories
Inventory consists of finished goods which are stated at the lower of
cost (determined by the first-in, first out method) or market.
Depreciation and Amortization
Property, plant and equipment are recorded at cost. Depreciation on
equipment, furniture and fixtures and leasehold improvements is computed
on the straight line method over the estimated useful lives of such
assets between 5-10 years. Maintenance and repairs are charged to
operations as incurred. Software assets acquired pursuant to the Rolina
and Vanity agreements are amortized on the straight line method over 10
years.
Securities Issued for Services
The Company accounts for stock options issued for services by reference
to the fair market value of the Company's stock on the date of stock
issuance or option grant. Compensation expense is recorded for the fair
market value of the stock issued, or in the case of options, for the
difference between the stock's fair market value on the date of grant
and the option exercise price.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-based
Compensation". The statement generally suggests, but does not require,
employee stock-based compensation transactions be accounted for based on
the fair value of the consideration received or the fair value of the
equity instruments issued, whichever is more reliably measurable.
7
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
Income Taxes
The Company provides for income taxes based on enacted tax law and
statutory tax rates at which items of income and expenses are expected
to be settled in the Company's income tax return. Certain items of
revenue and expense are reported for Federal income tax purposes in
different periods than for financial reporting purposes, thereby
resulting in deferred income taxes. Deferred taxes are also recognized
for operating losses that are available to offset future taxable income.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. The Company has
incurred net operating losses for financial-reporting and tax-reporting
purposes. Accordingly, the benefit for income taxes has been offset
entirely by a valuation allowance against the related deferred tax asset
for the periods ended March 31, 1999.
Net Loss Per Share
Net loss per share, in accordance with the provisions of Financial
Accounting Standards Board No. 128, "Earnings Per Share" is computed by
dividing net loss by the weighted average number of shares of Common
Stock outstanding during the period. Common Stock equivalents have not
been included in this computation since the effect would be
anti-dilutive.
Revenue Recognition
Revenue from hardware product sales is recognized at the time of
shipment provided that the resulting receivable is deemed probable of
collection. Revenue from software sales is recognized at the time of
licensing provided that the resulting receivable is deemed probable of
collection.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
PREPAID EXPENSES
Prepaid expenses include a position of $375,000 resulting from an
agreement in February 1998 with BNN Business News Network Inc., a
nationwide media advertising and radio network company , whereby the
Company purchased advertising time on the Business News Network's
broadcasts , usable over a period of three years and aggregating
$900,000 in retail value, against issuance of 150,000 new and restricted
common shares. The services purchased were capitalized at the then fair
market value of the stock issued, for a total of $375,000. The resulting
asset will be amortized as utilized, over the time frame of the next two
years. As per the date of this report, no portion of this asset has been
utilized. The Company is currently analyzing the utility of this
advertising credit in light of current business strategies. If
management deems that it may not be able to economically utilize the
entire amount during the time allotted, it may elect to effect an
accelerated amortization or write-down of this asset position.
8
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at March 31, 1999:
Equipment $ 195,903
Furniture and fixtures 66,093
Leasehold improvements 45,770
------------
307,766
Less accumulated depreciation 168,892
------------
Total $ 138,874
============
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following at March 31,
1999:
Accounts payable $ 601,735
Accrued interest 280,054
Accrued commissions 71,768
Accrued professional fees 55,709
Miscellaneous accruals 94,279
------------
Total $ 1,103,545
============
LOANS PAYABLE
Magnitude, Inc. and the Company had borrowings under short term loan agreements
with the following terms and conditions at March 31, 1999:
Pursuant to three promissory notes signed throughout 1995 $ 90,000
and 1996, an investor advanced Magnitude, Inc. a total of
$90,000 payable upon demand with interest at 12% per annum.
On December 4, 1996, Magnitude, Inc. repurchased the 75,000
equivalent of 144,192 shares of its common stock and retired
same against issuance of a promissory note maturing twelve
months thereafter accruing interest at 5% per annum and due
December 4, 1998. This note is overdue at March 31, 1999 and
no demand for payment has been made through April 7, 1999
Pursuant to the Rolina Corporation Agreement & Plan of 100,000
Merger dated February 2, 1998 the Company was to deliver to
Steven D. Rudnik $100,000 eight months from the closing
date. Such amount is overdue and as a result Mr. Rudnik has
a lien on certain software products. In February 1999, a
director and shareholder of the Company provided a demand 42,500
loan to the Company which is carried as a non-interest --------
bearing cash advance.
Total $307,500
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9
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTES PAYABLE
Private Placement Offering
During February through June 1995, an underwriter acting as placement
agent, on behalf of Magnitude, Inc. placed, in a private placement
offering, an aggregate 16 units, each consisting of a $100,000, 12%
promissory note and 10,000 shares of Magnitude, Inc.'s common stock. The
promissory notes were originally due on the earlier of 12 months from
their issuance or the completion of a public or private financing of
either debt or equity securities of Magnitude, Inc., and were
subsequently extended for an additional 6 months, and further by an
additional 9 months. In May 1997 a restructuring agreement caused
$1,075,000 of these notes to be extended and modified to, among other,
mature by April 30, 2000. Two such notes, however, totaling $200,000
were extended and modified to, among other, mature on dates ranging from
January 1, 1999 through April 30, 2000. The total amount of notes
outstanding at March 31, 1999 was $1,475,000, of which $550,000 is
current.
LONG-TERM DEBT
Long-term debt as of March 31, 1999 is comprised of the following:
Note to the board chairman, principal due May 31, 2000 $351,060
accruing interest at a rate of 10% per annum. This note is
secured by all of Magnitude Inc.'s assets and property.
Discounted present value of a non-interest bearing $70,000 33,529
settlement with a former investor of Magnitude, Inc. to be
paid in 24 equal monthly payments commencing July 1, 1997.
The imputed interest rate used to discount the note is 8%
per annum.
Discounted present value of a non-interest bearing 30,974
$176,000 settlement with former counsel of
Magnitude, Inc. to be paid in 24 monthly payments commencing
September 1, 1997. The imputed interest rate used to
discount the note is 8% per annum. --------
Total 415,563
Less current maturities 64,503
--------
Long-term debt, net of current maturities $351,060
========
10
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
INCOME TAXES
At December 31, 1998, The Company had net operating loss carry forwards
approximating $8,900,000 which expire between the years 2008 and 2013
and are subject to certain annual limitations.
The Company's total deferred tax asset and valuation allowance at December 31,
1998 are as follows:
Total deferred tax asset $3,560,000
Less valuation allowance 3,560,000
Net deferred tax asset $ --
==========
COMMITMENTS AND CONTINGENCIES
Lease Agreement
Magnitude, Inc. leases its administrative offices pursuant to a lease
agreement dated December 9, 1998. Such lease commences December 16, 1998
and expires on December 31, 2001 and requires monthly payments of $3,700
from December 16, 1998 to October 31, 1999 and $3,250 from November 1, 1999
to December 31,1999.
Licensing Agreement
Pursuant to an August 29, 1997 letter of intent, the Company may acquire
Cornell Ergonomics ("Cornell"), a software developer of a unique ergonomic
assessment tool. This agreement was subsequently revised on December 1,
1997 through a Software Distribution and Option Agreement whereby the
Company obtained a two-year exclusive license to distribute and sub-license
a certain software product and obtained the exclusive right, under certain
circumstances, to purchase either the assets of Cornell or all of the
issued and outstanding capital stock of Cornell.
Put Option
Pursuant to the February 2, 1998, Agreement and Plan of Merger with Rolina
Corporation (see "Background") the Company had issued 155,556 shares (the
"Shares") of its common stock to the principal of Rolina Corporation who
currently serves as the Company's President and Chief Executive Officer,
and a Put Option for such Shares. This Put Option requires the Company to
repurchase up to 155,556 of the Shares at a price of $2.41 per share upon
notice of such option exercise in accordance with the provisions contained
therein, such notice eligible to be given at any time after February 1,
2000, and before 5:00 p.m. on the 90th day thereafter.
RELATED PARTY TRANSACTIONS
In November 1998, the Company entered into a consulting agreement with an
individual who subsequently, in January 1999, joined the Company's board of
directors, and pursuant to which the Company issued 1,000,000 shares of
common stock. Such shares were registered on Form S-8 on December 22, 1998.
During the first quarter of 1999, this individual pursuant to the
consulting agreement obtained the release of approximately $436,000 of the
Company's liabilities.
Between December 30, 1998, and March 31, 1999, a director and principal
shareholder extended working capital loans aggregating $395,560 to the
Company, of which a portion of $351,060 was covered by a promissory note
bearing interest at the rate of 10% p.a. During the same time, this
director and shareholder exercised options to purchase 450,000 shares of
the common stock of the Company and was issued an additional 565,000
shares, against a combination of cash payments and cancellation of debt
owed by the Company, in the aggregate amount of $507,500.
11
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MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
RELATED PARTY TRANSACTIONS, continued
On April 1, 1999, the Company's board of directors authorized the issuance
of up to 600,000 shares of the Company's common stock to certain directors
and officers of the Company and registration of same on Form S-8, for
services as employees or consultants during 1999, and in lieu of salary
from May 1, 1999, to the end of the year, or other remuneration.
CHANGES IN KEY PERSONNEL
In January 1999, Steven D. Rudnik was appointed President and CEO of the
Company, taking over the position previously occupied by Jerry Swon, who
continues to serve as a director of the Company. At the same time, Mr.
Rudnik was named a director of the Company.
12
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
New Software Business and Results of Operations:
Effective with the sale of the hardware business in November 1998 to Office
Specialty (see "Background" in Notes to Financial Statements) no further
revenues were being generated from this product line, aside from royalties on
third party revenues from the sales of such hardware products which amounted to
$63,675 for the quarter and which are included in non-operating income. In the
aftermath of the Office Specialty transaction, the Company's revenue base is
being supplied solely by the licensing of the Company's proprietary software. As
such, the Company currently must be considered an enterprise in transition,
because it has not yet realized material revenues from licensing its software.
The software business accounted for less than 3% of total revenues during 1998
or $72,486. A comparison of revenues to last year's fiscal quarters therefore is
not meaningful. Comparisons of operating expenses likewise are of limited
usefulness, and will therefore only be made where appropriate.
The Company is currently introducing to the market its new Proformix EMS(TM)
suite of software products. This unique product is the first integrated suite of
software tools that provides a complete compliance system for evaluation and
management of ergonomic risk factors for the computer workplace. The software
also provides an effective productivity measuring tool that can make a
verifiable difference in any company's bottom line. The Company's proprietary
software products are designed to help businesses deal with potentially
preventable repetitive stress injuries, by real-time monitoring of keyboarding
activities, pro-active dialog with at-risk employees, and strategic profiling
and management of computer use throughout an organization.
The sales cycle for larger projects involving software related products is
relatively long, and the new products therefore are not expected to yield
significant new revenues before later in this fiscal year. Revenues during the
quarter ended March 31, 1999, totaled $44,507 and were supplied primarily from
what the Company classifies as "pilot projects". Typically, in view of the
new-ness of product and market, a client initially purchases a license for a
"pilot version" of the software, functionally complete but limited to a smaller
number of users. After undergoing a process of familiarization and evaluation
the client is expected to upgrade to the intended ultimate number of users
which, by definition, should encompass all personnel exposed to the above
described risks. Many tests and evaluations by third parties have confirmed to
the Company's satisfaction that its product is mature, stable, and effective. It
is with a high degree of confidence, therefore, that the Company expects many of
the ongoing trial installations to lead to larger enterprise orders and,
thereby, to the targeted revenue stream.
Software assets underlying the Company's products are being amortized on a
straight line over 10 years, resulting in a level charge of approximately
$12,000 per month to cost-of-goods-sold. Selling expenses amounted to $165,471
and general and administrative expenses totaled $421,975 for the quarter. The
relatively large amount of G&A expenses is attributable to the fact that most of
the Company's operating expenses currently have fixed or quasi-fixed character
covering the cost of maintaining an operational infrastructure required for the
business. While the software business to a significant degree is less capital
intensive than the Company's previously dominant hardware business, its overall
cost structure is less sensitive to changes in volume. This burdens the Company
with a certain level of fairly constant expenses during the period when it is
only beginning to realize cash flow from revenues. However, after passing the
break-even point the Company will be the beneficiary of significant cash flows
from any further revenue increases. The operating results for the quarter ended
March 31, 1999, was a loss of $585,815. The net loss for the quarter was
$587,662 or $0.08 per share.
13
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Liquidity and Capital Resources
The Company's cash needs to finance both the loss from operations during the
quarter, and a reduction in current liabilities of approximately $570,000 since
the beginning of the year, were satisfied primarily through placement of common
equity in private transactions (see section "Related Party Transactions"). Such
financing transactions resulted in a noticeable relative improvement in the
working capital deficit, which decreased from approximately $2,200,000 at
December 31, 1998, to $1,400,000 at March 31, 1999. The deficit, however,
continues to impose serious constraints on the Company's liquidity, which are
aggravated by the continuing negative cash flow from operations. To alleviate
these constraints, management has since the end of the quarter negotiated the
placement of an aggregate $500,000 in convertible debt with private investors
which, at the time of this submission has resulted in the receipt of
approximately the same amount in cash. Management anticipates a further need
during the upcoming quarters to augment working capital through outside
financing. Management's efforts in this direction center around securing
additional funding from a variety of sources including debt instruments, and a
liquidation of unused NOL's expected to generate approximately $500,000, the
latter subject to finalization of pertinent current New Jersey tax legislation.
14
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PART II - OTHER INFORMATION
Item 1 LEGAL PROCEEDINGS
In response to this item, reference is made to the Company's reports on Form
10-KSB for the year ended December 31, 1998, as previously submitted.
Item 2 CHANGES IN SECURITIES
During the first quarter of 1999 and through May 12, 1999, the Company issued
the following unregistered securities:
(i) 565,000 shares of Common Stock to a director and principal shareholder
in exchange against cancellation of promissory notes and interest thereon in the
aggregate value of $282,500 (see "Related Party Transactions");
(ii) 77,778 shares of Common Stock to the former principal of Rolina
Corporation (see "Background") and current President of the Company, pursuant to
a Non-Dilution clause in the February 2, 1998 Agreement and Plan of Merger with
Rolina Corporation;
(iii) 54,100 shares of Common Stock to three Magnitude, Inc. consultants
and providers of services to the Company.
Item 3 DEFAULTS ON SENIOR SECURITIES - None
Item 4 SUBMISSION OF MATTERS TO A VOTE OF
SECURITIES' HOLDERS - None
Item 5 OTHER INFORMATION - None
Item 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule - is attached hereto.
(b) Reports on Form 8-K: - A report was filed on January 27, 1999, to
announce the consummation of an Asset Purchase Agreement and related agreements
with 1320236 Ontario Inc. d/b/a Office Specialty, and is included herein by
reference.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MAGNITUDE INFORMATION SYSTEMS, INC.
Date: May 13, 1999 By: _____________________________________
Steven D. Rudnik
President and Chief Executive Officer
16
<PAGE>
MAGNITUDE INFORMATION SYSTEMS, INC. AND SUBSIDIARIES
EXHIBIT 27
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE MARCH
31, 1999 FINANCIAL STATEMENTS OF MAGNITUDE INFORMATION SYSTEMS, INC. AND
SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
<TABLE>
<CAPTION>
Item Number Item Description March 31, 1999
- ----------- ---------------- --------------
<S> <C> <C>
5-02(1) Cash and cash items 823.00
5-02(2) Marketable securities -
5-02(3)(a)(1) Notes and accounts receivable - trade 187,552.00
5-02(4) Allowances for doubtful accounts 106,589.00
5-02(6) Inventory 26,789.00
5-02(9) Total current assets 655,258.00
5-02(13) Property, plant and equipment 307,766.00
5-02(14) Accumulated depreciation 168,892.00
5-02(18) Total assets 2,162,575.00
5-02(21) Total current liabilities 2,050,374.00
5-02(22) Bonds, mortgages and similar debt 1,305,899.00
5-02(28) Preferred stock - mandatory redemption -
5-02(29) Preferred stock - no mandatory redemption -
5-02(30) Common stock 835.00
5-02(31) Other stockholders' equity (deficit) (1,194,533.00)
5-02(32) Total liabilities and stockholders' equity 2,162,575.00
5-03(b)1(a) Net sales of tangible products 44,507.00
5-03(b)1 Total revenues 44,507.00
5-03(b)2(a) Cost of tangible goods sold 42,876.00
5-03(b)2 Total costs and expenses applicable
to sales and revenues 165,471.00
5-03(b)3 Other costs and expenses 421,975.00
5-03(b)5 Provision for doubtful accounts and notes 1,887.00
5-03(b)(8) Interest and amortization of debt discount 51,837.00
5-03(b)(10) Income/loss before taxes and other items (587,662.00)
5-03(b)(11) Income tax expense -
5-03(b)(14) Income/loss continuing operations (587,662.00)
5-03(b)(15) Discontinued operations -
5-03(b)(17) Extraordinary items -
5-03(b)(18) Cumulative effect - changes in
accounting principles -
5-03(b)(19) Net income or loss (587,662.00)
5-03(b)(20) Earnings per share - primary (0.08)
5-03(b)(20) Earnings per share - fully diluted (0.08)
</TABLE>
17
